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|March 9, 2014|
How the new U.S. JOBS Act will transform retirement
The recently passed JOBS Act may go down as one of history’s most revolutionary pieces of legislation, relative to the future of planning and investing for retirement. The bill is designed to make it easier for small business to access investment capital and, by doing so, will create a new, Crowd-funding asset class as well as bring self-directed IRA’s out of the shadows and into the spotlight.
In recent years a variety of alternative asset classes have gained popularity. Private equity funds, long-short funds, target date funds, and everything in between, have become part of the conversations that advisors are having with clients. Through the crowd-funding segment of the new Jobs Act, entrepreneurs can now offer small amounts of stock to individuals and companies through the Internet or elsewhere, allowing them to raise as much as $1 million annually without being required to register the shares for public trading with the Securities and Exchange Commission.
At first glance, these may seem a little scary, and many opponents suggest this will ring in a new era of fraud. However, one doesn’t have to look far to realize that fraud will always be a part of the investment world and investors should proceed accordingly. Seriously, how pathetic is it that a former senator and his colleagues at MF Global are still short billions of investor dollars but walk around as if nothing wrong has happened? And how about the billions (not millions) of dollars Bernie Madoff and the forgetful Robert Allen Stanford scammed people out of? Investors can’t, and shouldn’t, rely on the government or regulatory agencies to perform their due diligence. This type of investing isn’t for everyone but for those who are willing to do their homework and assume some risk, it could not only help fund the next Google or Apple but also boost the economy while adding jobs.
Looking at it from a portfolio management perspective, crowd-funding could provide excellent diversification. Investors who commit some of their money to a local start-up will find that their investment isn’t affected by the same factors that drive the general stock market. Generally speaking, there’s very little correlation between your son’s computer company being run out of your garage and the S&P 500. If one of the major indices drops 5%-10%, the local company isn’t going to be affected and, if they’re working as hard as they should be, they won’t even know.
Investors should treat this new asset class like other alternatives, allocating only a small portion of their overall assets. One benefit to the crowd-funding portion of the legislation is that it should allow a larger number of investors to participate in a new, unregulated start-up as compared to current guidelines and requirements, ideally reducing the amount each investor will need to contribute in order to participate.
Self-directed IRAs will shine
For years wealthy investors have been using the benefits of the self-directed IRAs to grow their net-worth. In fact, many people were surprised to learn that Mitt Romney had accumulated more than $20 million dollars in his IRA because he owned his former company’s stock within it. Others have used the power of self-directed IRAs to buy and sell residential and commercial real estate. And now, savvy entrepreneurs will have a huge opportunity to use self-directed IRAs to attract new capital. In fact, I expect the self-directed IRA market to experience dramatic growth in the next few years. According to a report by the SEC’s Office of Investor Education and Advocacy and the North American Securities Administrators Association, currently less than 2%, or $94 billion, of the estimated $4.7 trillion in IRA assets are held in self-directed programs.
Quite frankly, it doesn’t require much more than common sense to see the growth potential in this area. Many of the so-called “99 percent” are sick of the ups and downs of the markets. They think the game is rigged and they’re tired of being jerked around by it. This bill, combined with other business program like ROBS (Roll-over for business start-ups), will cause an explosion in the number of entrepreneurs staring a new business … particularly by baby boomers not ready to retire and wanting to turn a passion or hobby into a part-time business or to generate investment income for retirement.
Fact is, Congress has finally stepped up by creating the new JOBS Act and by doing so, given investors, a monumental opportunity to use both crowd-funding and subsequently, self-directed IRAs to help stimulate the economy. Combined, I expect each of these factors to revolutionize the way people plan for and invest in retirement. (Source: Forbes)
Story Date: April 1, 2012